Federal Reserve Signals No Change in Rates Until 2024… In the press conference after its regularly scheduled meeting, Federal Reserve Chair Jay Powell noted that the bankers expect to hold short-term rates at zero through 2023.
What it means— Powerful, powerful, powerful! Powell used that word 10 times in his press conference to describe the Fed’s signal on rates and inflation. If you don’t feel moved to action by his words, borrowing and spending with abandon, well, that’s a problem.
The Fed is trying to talk consumers, investors, and business owners into action by letting us know that it won’t raise rates even as inflation walks higher and crosses above 2%. For their words to have power, we must believe that inflation will actually go that high in the months ahead. That seems unlikely. The rationale is, if prices will rise soon, we will buy now before the increase. Without significant evidence of higher prices, we spend when we need it, later. That is deflationary, the opposite outcome.
The central bankers aren’t out of tools, but with rates at zero and the printing press churning out more than $100 billion per month to buy debt, they’re definitely stretched. Don’t buy Powell’s assertion that they have plenty of lending power with which to drive the economy. They need borrowers for that to happen.
So far, the Fed is a classic case of parental instruction: “Do what I say. Not what I do.”
1) The Main Street Credit Facility to help mid-size and small businesses has only issued 0.2% of planned funds.
2) The Fed’s purchase of bond ETFs has only used 11% of the committed funds.
3) The Fed committed $80 billion for mortgage backed securities in the last eight weeks. Less than 25% has been spent.
The real outcome of the Fed’s expected inaction will be a steady redistribution of wealth from savers to borrowers. Savers will earn very little and borrowers will be the beneficiaries of cheap loans.
Initial Jobless Claims Barely Budge at 860,000… The number of people filing for unemployment benefits from state programs for the first time barely dipped from 893,000.
What it means— The number of people filing for continuing claims across all programs ticked up a bit, from 29.67 million to 29.77 million. These numbers are reported on a two-week lag, so they come from the end of August. With initial claims still at elevated levels and continuing claims hovering near 30 million, we’ve got a long way to go to solve unemployment.
Real Median Income Reached Record Growth and Levels in 2019… Adjusted for inflation, median household income jumped 6.8%, to $68,703 in 2019.
What it means— Can we turn the calendar back a few months so we can celebrate? The latest household income information is fabulous. Not only did incomes rise at the fastest rate in history and reach the highest levels, but the income gap between rich and poor, as well as among ethnic groups, narrowed. To top it off, the percentage of the nation living in poverty dropped to 10.5%, the lowest level since recordkeeping began in 1959 and more than 4% lower than it was in 2014.
That’s awesome, but the pesky coronavirus and economic shutdown have definitely set us back. With everything that’s happened in the last six months, it feels like both 2019 and all of this good news happened eons ago.
Retail Sales Increase in August, But at Slower Pace… Retail sales increased 0.6% last month, 0.1% less than the forecast. Sales are now 2% higher than in February.
What it means— We’re still living with the lockdown. While retail sales have bounced back, restaurant sales are still 15% lower than at this time last year. Clothing store sales are down 20%. E-commerce sales are 22% higher but have recently leveled off. Auto sales increased 0.2% last month. The back-to-school shopping season didn’t have the same punch this year. Many consumers had already purchased electronics and other gadgets at the end of last year. Further, who needs new clothes when you wear your pajamas when Zoom-ing to class?
Housing Starts Down 5% in August, Up 3% Over Last Year… At almost 1.5 million units, housing starts remain strong. The drop during the month reflects a 25% fall in multifamily construction.
What it means— With forest fires raging out West and Hurricane Laura barreling across the South, it’s understandable that some construction shut down last month. Housing starts are volatile month-to-month anyway. We’re still way behind in construction for the last decade, given the number of newly minted adults who should be forming households. When we add the buying pressure of renters leaving urban areas and putting down roots in the suburbs, it drains even more inventory from the market.
The only caveat in the industry is the possibility of foreclosures in the months ahead as forbearance and deferral programs come to an end. The first six-month period, which started in March, is over. Many homeowners in these programs have rolled into a second six-month program, but not all of them have, and the programs won’t last forever.
Data supplied by HS Dent Research
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